IDEAS home Printed from https://ideas.repec.org/a/eee/ejores/v307y2023i1p177-192.html
   My bibliography  Save this article

Getting more third-party participants on board: Optimal pricing and investment decisions in competitive platform ecosystems

Author

Listed:
  • Zhu, Weijun
  • Xie, Jiaping
  • Xia, Yu
  • Wei, Lihong
  • Liang, Ling

Abstract

In two-sided markets, hardware/software platforms meet the unified and personalized demands of consumers through hardware and software products respectively, forming their own ecosystems. For platform enterprises, how to drive third-party value creation through interface extensibility investment (typically on application programming interfaces, or APIs) under different pricing schemes, has become a critical issue under intensified competition. In this paper, we build game theoretic models in four platform competition scenarios (NR, NRT, IR, IRT) considering both investment decisions—no investment (N), investment (I), and pricing decisions—registration fee only (R), registration fee and transaction fee (RT), and analyze the competitive equilibrium in each scenario. Our results show that: (1) Although “reducing price” and “enhancing investment” are partial substitutes, platforms are still incentivized to implement both strategies. Contrary to the traditional wisdom, when platforms with investment charge both registration and transaction fees, the strengthening of cross-side network effect may lead to an increase in registration fee on both sides. (2) The improvement of interface extension effectiveness (cost reduction for developers per unit of investment from platforms) shifts more developers from single-homing to multi-homing, leading to fiercer market competition and thus lower platform profit in equilibrium. (3) Although implementing investment may not be optimal from the profit perspective, it does help platforms in securing a larger market share on the developer side. (4) The existence of same-side network effect enhances both side users’ incentive to enter the market; however, for the platforms, they should carefully mind the irrational price competition to avoid falling into profit-hurting traps.

Suggested Citation

  • Zhu, Weijun & Xie, Jiaping & Xia, Yu & Wei, Lihong & Liang, Ling, 2023. "Getting more third-party participants on board: Optimal pricing and investment decisions in competitive platform ecosystems," European Journal of Operational Research, Elsevier, vol. 307(1), pages 177-192.
    • Handle: RePEc:eee:ejores:v:307:y:2023:i:1:p:177-192
    DOI: 10.1016/j.ejor.2022.08.035
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0377221722006798
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ejor.2022.08.035?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Dawoon Jung & Byung Cho Kim & Myungsub Park & Detmar W. Straub, 2019. "Innovation and Policy Support for Two-Sided Market Platforms: Can Government Policy Makers and Executives Optimize Both Societal Value and Profits?," Information Systems Research, INFORMS, vol. 30(3), pages 1037-1050, September.
    2. Gawer, Annabelle, 2014. "Bridging differing perspectives on technological platforms: Toward an integrative framework," Research Policy, Elsevier, vol. 43(7), pages 1239-1249.
    3. Yanan Ji & Yi Li & Wenzhi Tang, 2022. "Service Investment and Pricing Strategies in E-Commerce Platforms With Seller Competition," International Journal of Information Systems and Supply Chain Management (IJISSCM), IGI Global, vol. 15(1), pages 1-21, January.
    4. Mark Armstrong, 2006. "Competition in two‐sided markets," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 668-691, September.
    5. Ramnath K. Chellappa & Rajiv Mukherjee, 2021. "Platform Preannouncement Strategies: The Strategic Role of Information in Two-Sided Markets Competition," Management Science, INFORMS, vol. 67(3), pages 1527-1545, March.
    6. Jean‐Charles Rochet & Jean Tirole, 2006. "Two‐sided markets: a progress report," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 645-667, September.
    7. Carmelo Cennamo & Hakan Ozalp & Tobias Kretschmer, 2018. "Platform Architecture and Quality Trade-offs of Multihoming Complements," Information Systems Research, INFORMS, vol. 29(2), pages 461-478, June.
    8. Caillaud, Bernard & Jullien, Bruno, 2003. "Chicken & Egg: Competition among Intermediation Service Providers," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 309-328, Summer.
    9. Zhuoxin Li & Ashish Agarwal, 2017. "Platform Integration and Demand Spillovers in Complementary Markets: Evidence from Facebook’s Integration of Instagram," Management Science, INFORMS, vol. 63(10), pages 3438-3458, October.
    10. Carliss Y. Baldwin & C. Jason Woodard, 2009. "The Architecture of Platforms: A Unified View," Chapters, in: Annabelle Gawer (ed.), Platforms, Markets and Innovation, chapter 2, Edward Elgar Publishing.
    11. Carliss Y. Baldwin & Kim B. Clark, 2000. "Design Rules, Volume 1: The Power of Modularity," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262024667, April.
    12. Burcu Tan & Edward G. Anderson, Jr. & Geoffrey G. Parker, 2020. "Platform Pricing and Investment to Drive Third-Party Value Creation in Two-Sided Networks," Information Systems Research, INFORMS, vol. 31(1), pages 217-239, March.
    13. Rattanasuda Poolsombat & Gianluigi Vernasca, 2006. "Partial Multihoming in Two-sided Markets," Discussion Papers 06/10, Department of Economics, University of York.
    14. Liu, He & Qiao, Han & Wang, Shouyang & Li, Yuze, 2019. "Platform Competition in Peer-to-Peer Lending Considering Risk Control Ability," European Journal of Operational Research, Elsevier, vol. 274(1), pages 280-290.
    15. Jean-Charles Rochet & Jean Tirole, 2003. "Platform Competition in Two-Sided Markets," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 990-1029, June.
    16. Dan Ma & Abraham Seidmann, 2015. "Analyzing Software as a Service with Per-Transaction Charges," Information Systems Research, INFORMS, vol. 26(2), pages 360-378, June.
    17. Annabelle Gawer, 2009. "Platform Dynamics and Strategies: From Products to Services," Chapters, in: Annabelle Gawer (ed.), Platforms, Markets and Innovation, chapter 3, Edward Elgar Publishing.
    18. Xie, Jiaping & Zhu, Weijun & Wei, Lihong & Liang, Ling, 2021. "Platform competition with partial multi-homing: When both same-side and cross-side network effects exist," International Journal of Production Economics, Elsevier, vol. 233(C).
    19. Evans David S., 2003. "Some Empirical Aspects of Multi-sided Platform Industries," Review of Network Economics, De Gruyter, vol. 2(3), pages 1-19, September.
    20. Rahul Kapoor, 2018. "Ecosystems: broadening the locus of value creation," Journal of Organization Design, Springer;Organizational Design Community, vol. 7(1), pages 1-16, December.
    21. Yannis Bakos & Hanna Halaburda, 2020. "Platform Competition with Multihoming on Both Sides: Subsidize or Not?," Management Science, INFORMS, vol. 66(12), pages 5599-5607, December.
    22. Edward G. Anderson Jr. & Geoffrey G. Parker, 2013. "Integration of Global Knowledge Networks," Production and Operations Management, Production and Operations Management Society, vol. 22(6), pages 1446-1463, November.
    23. Ke Rong & Di Zhou & Xinwei Shi & Wei Huang, 2022. "Social Information Disclosure of Friends in Common in an E‐commerce Platform Ecosystem: An Online Experiment," Production and Operations Management, Production and Operations Management Society, vol. 31(3), pages 984-1005, March.
    24. Vidgen, Richard & Shaw, Sarah & Grant, David B., 2017. "Management challenges in creating value from business analytics," European Journal of Operational Research, Elsevier, vol. 261(2), pages 626-639.
    25. Siobhan O'Mahony & Rebecca Karp, 2022. "From proprietary to collective governance: How do platform participation strategies evolve?," Strategic Management Journal, Wiley Blackwell, vol. 43(3), pages 530-562, March.
    26. Hagiu, Andrei & Hałaburda, Hanna, 2014. "Information and two-sided platform profits," International Journal of Industrial Organization, Elsevier, vol. 34(C), pages 25-35.
    27. Andrei Hagiu & Daniel Spulber, 2013. "First-Party Content and Coordination in Two-Sided Markets," Management Science, INFORMS, vol. 59(4), pages 933-949, April.
    28. Lin, Xiaogang & Zhou, Yong-Wu & Xie, Wei & Zhong, Yuanguang & Cao, Bin, 2020. "Pricing and Product-bundling Strategies for E-commerce Platforms with Competition," European Journal of Operational Research, Elsevier, vol. 283(3), pages 1026-1039.
    29. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
    30. Tobias Kretschmer & Aija Leiponen & Melissa Schilling & Gurneeta Vasudeva, 2022. "Platform ecosystems as meta‐organizations: Implications for platform strategies," Strategic Management Journal, Wiley Blackwell, vol. 43(3), pages 405-424, March.
    31. Amrit Tiwana, 2015. "Evolutionary Competition in Platform Ecosystems," Information Systems Research, INFORMS, vol. 26(2), pages 266-281, June.
    32. Edward G. Anderson & Geoffrey G. Parker & Burcu Tan, 2014. "Platform Performance Investment in the Presence of Network Externalities," Information Systems Research, INFORMS, vol. 25(1), pages 152-172, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Tang, Hua & Chen, Jing & Ai, Xingzheng & Li, Xiaojing & He, Haojia, 2023. "First-party content decision under competitive hardware/software platforms: Free vs. charge," European Journal of Operational Research, Elsevier, vol. 311(3), pages 1068-1083.
    2. Granstrand, Ove, 2024. "A cooperative game theory systems approach to the value analysis of (innovation) ecosystems," Technovation, Elsevier, vol. 130(C).
    3. Gu, Wei & Heese, H. Sebastian & Kemahlıoğlu-Ziya, Eda & Ziya, Serhan, 2024. "Pricing for services with cross-segment externalities, capacity constraints, and competition," European Journal of Operational Research, Elsevier, vol. 313(2), pages 801-813.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jacobides, Michael G. & Cennamo, Carmelo & Gawer, Annabelle, 2024. "Externalities and complementarities in platforms and ecosystems: From structural solutions to endogenous failures," Research Policy, Elsevier, vol. 53(1).
    2. Jan Frederic Nerbel & Markus Kreutzer, 2023. "Digital platform ecosystems in flux: From proprietary digital platforms to wide-spanning ecosystems," Electronic Markets, Springer;IIM University of St. Gallen, vol. 33(1), pages 1-20, December.
    3. Sui, Ronghua & Zhang, Xumei & Dan, Bin & Zhang, Haiyue & Liu, Yi, 2023. "Bilateral value-added service investment in platform competition with cross-side network effects under multihoming," European Journal of Operational Research, Elsevier, vol. 304(3), pages 952-963.
    4. Xie, Jiaping & Zhu, Weijun & Wei, Lihong & Liang, Ling, 2021. "Platform competition with partial multi-homing: When both same-side and cross-side network effects exist," International Journal of Production Economics, Elsevier, vol. 233(C).
    5. Tang, Hua & Chen, Jing & Ai, Xingzheng & Li, Xiaojing & He, Haojia, 2023. "First-party content decision under competitive hardware/software platforms: Free vs. charge," European Journal of Operational Research, Elsevier, vol. 311(3), pages 1068-1083.
    6. Carmelo Cennamo & Hakan Ozalp & Tobias Kretschmer, 2018. "Platform Architecture and Quality Trade-offs of Multihoming Complements," Information Systems Research, INFORMS, vol. 29(2), pages 461-478, June.
    7. Carmen Leong & Silvia Lin & Felix Tan & Jie Yu, 2024. "Coordination in a Digital Platform Organization," Information Systems Research, INFORMS, vol. 35(1), pages 363-393, March.
    8. Bruno Jullien & Alessandro Pavan & Marc Rysman, 2021. "Two-sided markets, pricing, and network effects," Post-Print hal-03828345, HAL.
    9. Steffen, Nico & Wiewiorra, Lukas & Kroon, Peter, 2021. "Wettbewerb und Regulierung in der Plattform- und Datenökonomie," WIK Discussion Papers 481, WIK Wissenschaftliches Institut für Infrastruktur und Kommunikationsdienste GmbH.
    10. Nico Wiegand & Yuri Peers & Alexander Bleier, 2023. "Software multihoming to distal markets: Evidence of cannibalization and complementarity in the video game console industry," Journal of the Academy of Marketing Science, Springer, vol. 51(2), pages 393-417, March.
    11. Maximilian Julius Krome & Ulrich Pidun, 2023. "Conceptualization of research themes and directions in business ecosystem strategies: a systematic literature review," Management Review Quarterly, Springer, vol. 73(2), pages 873-920, June.
    12. Xiaoxi Zhu & Changhui Yang & Kai Liu & Rui Zhang & Qingquan Jiang, 2022. "Cooperation and decision making in a two-sided market motivated by the externality of a third-party social media platform," Annals of Operations Research, Springer, vol. 316(1), pages 117-142, September.
    13. Sui, Ronghua & Liu, Molin & Liu, Yi & Zha, Xiaoyu, 2024. "Two-sided dynamic pricing and value-added service investment strategies of competitive platforms considering indirect network effects," International Journal of Production Economics, Elsevier, vol. 272(C).
    14. Jørgen Veisdal, 2020. "The dynamics of entry for digital platforms in two-sided markets: a multi-case study," Electronic Markets, Springer;IIM University of St. Gallen, vol. 30(3), pages 539-556, September.
    15. Veile, Johannes W. & Schmidt, Marie-Christin & Voigt, Kai-Ingo, 2022. "Toward a new era of cooperation: How industrial digital platforms transform business models in Industry 4.0," Journal of Business Research, Elsevier, vol. 143(C), pages 387-405.
    16. Yifan Dou & D. J. Wu, 2021. "Platform Competition Under Network Effects: Piggybacking and Optimal Subsidization," Information Systems Research, INFORMS, vol. 32(3), pages 820-835, September.
    17. Jin Li & Gary Pisano & Yejia Xu & Feng Zhu, 2023. "Marketplace Scalability and Strategic Use of Platform Investment," Management Science, INFORMS, vol. 69(7), pages 3958-3975, July.
    18. Christian Stummer & Dennis Kundisch & Reinhold Decker, 2018. "Platform Launch Strategies," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 60(2), pages 167-173, April.
    19. Yuki Inoue & Masataka Hashimoto & Takeshi Takenaka, 2019. "Effectiveness of Ecosystem Strategies for the Sustainability of Marketplace Platform Ecosystems," Sustainability, MDPI, vol. 11(20), pages 1-33, October.
    20. Shi, Xianwei & Liang, Xingkun & Luo, Yining, 2023. "Unpacking the intellectual structure of ecosystem research in innovation studies," Research Policy, Elsevier, vol. 52(6).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:307:y:2023:i:1:p:177-192. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eor .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.